While I have shown over the previous chapters that there is good reason to be skeptical of a future man-made climate catastrophe (at least from CO2), I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production. For example:

Bad government technology bets like the massive public subsidies of failed Solyndra

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently. For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of the life-cycle of these types of government interventions). Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries. Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

For years I have opposed steps like a Federal carbon tax or cap and trade system because I believe (and still believe) them to be unnecessary given the modest amount of man-made warming I expect over the next century. I would expect to see about one degree C of man-made warming between now and 2100, and believe most of the cries that "we are already seeing catastrophic climate changes" are in fact panics driven by normal natural variation (most supposed trends, say in hurricanes or tornadoes or heat waves, can't actually be found when one looks at the official data).

But I am exhausted with all the stupid, costly, crony legislation that passes in the name of climate change action. I am convinced there is a better approach that will have more impact on man-made CO2 and simultaneously will benefit the economy vs. our current starting point. So here goes:

The Plan

Point 1: Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point 2 below is also part of the plan. Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates out there of the social costs of CO2. I think methane is a rounding error, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain. I am even open to make the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

A Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production. What is the best way to reduce CO2 -- by substituting gas for coal? by more conservation? by solar, or wind? with biofuels? With a carbon tax, we don't have to figure it out. Different approaches will be tested in the marketplace. Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2. There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

Point 2: Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups. But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue they may not agree is an issue at all. So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax. Why? First, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes. Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- ie we might want to do it even if there was no such thing as greenhouse gas warming. In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public. Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force. After all, for most people, the primary single metric of economic health is the unemployment rate. So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3: Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs. But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go. The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept. If California wants to continue to subsidize wind generators, let them do it. That is between the state and its taxpayers (and for those who think the California legislature is crazy, that is what U-Haul is for).

Point 4: Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost). The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development. Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies have existed. But we are at least 2 generations of technology past what is in most US nuclear plants. Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years. I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense. France, which has the strongest nuclear base in the world, followed this strategy. Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion. But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth. China has seen the miracle over the last 30 years of having almost a billion people exit poverty. This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress. But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth. In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction. Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland. This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat. The net effect is more melting ice and higher Arctic temperatures. A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy. The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production. The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel. The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain. As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change: in the Arctic.

For those who have hung with me this entire series, many thanks for your interest. If you have questions, concerns, or outraged refutations, you are welcome to email me at the link above.

While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production. For example:

Bad government technology bets like the massive public subsidies of failed Solyndra

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently. For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions). Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries. Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

For years I have opposed steps like a Federal carbon tax or cap and trade system because I believe (and still believe) them to be unnecessary given the modest amount of man-made warming I expect over the next century. I would expect to see about one degree C of man-made warming between now and 2100, and believe most of the cries that "we are already seeing catastrophic climate changes" are in fact panics driven by normal natural variation (most supposed trends, say in hurricanes or tornadoes or heat waves, can't actually be found when one looks at the official data).

But I am exhausted with all the stupid, costly, crony legislation that passes in the name of climate change action. I am convinced there is a better approach that will have more impact on man-made CO2 and simultaneously will benefit the economy vs. our current starting point. So here goes:

The Plan

Point 1: Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point 2 below is also part of the plan. Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates out there of the social costs of CO2. I think methane is a rounding error, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain. I am even open to make the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

A Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production. What is the best way to reduce CO2 -- by substituting gas for coal? by more conservation? by solar, or wind? with biofuels? With a carbon tax, we don't have to figure it out. Different approaches will be tested in the marketplace. Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2. There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

Point 2: Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups. But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue they may not agree is an issue at all. So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax. Why? First, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes. Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- ie we might want to do it even if there was no such thing as greenhouse gas warming. In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public. Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force. After all, for most people, the primary single metric of economic health is the unemployment rate. So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3: Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs. But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go. The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept. If California wants to continue to subsidize wind generators, let them do it. That is between the state and its taxpayers (and for those who think the California legislature is crazy, that is what U-Haul is for).

Point 4: Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost). The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development. Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies have existed. But we are at least 2 generations of technology past what is in most US nuclear plants. Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years. I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense. France, which has the strongest nuclear base in the world, followed this strategy. Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion. But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth. China has seen the miracle over the last 30 years of having almost a billion people exit poverty. This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress. But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth. In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction. Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland. This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat. The net effect is more melting ice and higher Arctic temperatures. A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy. The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production. The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel. The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain. As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change: in the Arctic.

Postscript

Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics. I believe this is a perfectly sensible plan that even those folks who believe man-made global warming is a total myth ( a group to which I do not belong) could sign up for. The barrier, though, is tribal. I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What? We can't let those guys win. They are totally full of sh*t. They are threatening to throw me in jail for my opinions."

It was at this point I was reminded of a customer service story at my company. I had a customer who was upset call me, and I ended up giving them a full-refund and a certificate to come back and visit us in the future. I actually suspected there was more to the story, but I didn't want a bad review. The customer was happy, but my local manager was not. She called me and said, "That was a bad customer! He was lying to you. How can you let him win like that?" Does this sound familiar? I think we fall into this trap all the time in modern politics, worried more about preventing the other team from winning than about doing the right thing.

“We oppose ALL subsidies, whether existing or proposed, including programs that benefit us, which are principally those that are embedded in our economy, such as mandates,” wrote Philip Ellender, president Koch’s government affairs division, in a Wednesday letter to members of Congress.

Ellender singled out the wind production tax credit as particularly deleterious. But unlike that provision, some of the tax breaks included in the House package benefit activities in which Koch and its subsidiaries are heavily invested.

Koch subsidiary George Pacific, for instance, qualifies for a tax break for the production of cellulosic biofuels. Another subsidiary, Flint Hills Resources, operates biofuel production facilities that could benefit from another of the provisions.

Those tax breaks could improve Koch’s bottom line, but the company sees federal tax preferences in general as economically harmful.

“Koch doesn’t view these as ‘benefits’ even if they are in industries we’re in,” explained a source familiar with the company’s public affairs strategy. “They are wasteful and market distorting, and allow other firms to run businesses that aren’t making money any other way.”

Hardcore Keynesian theory says that even paying someone to dig a hole one day and fill it in the next is stimulative. This has always seemed insane to me -- how could it possibly be a net gain in growth and wealth to shift resources from productive activities to unproductive ones? But in line with this theory, the Keynesians in the Obama Administration have hit on the perfect stimulus:

A cargo train filled with biofuels crossed the border between the US and Canada 24 times between the 15th of June and the 28th of June 2010; not once did it unload its cargo, yet it still earned millions of dollars... The companies “made several million dollars importing and exporting the fuel to exploit a loophole in a U.S. green energy program.” Each time the loaded train crossed the border the cargo earned its owner a certain amount of Renewable Identification Numbers (RINs), which were awarded by the US EPA to “promote and track production and importation of renewable fuels such as ethanol and biodiesel.”

The European Union is overestimating the reductions in greenhouse gas emissions achieved through reliance on biofuels as a result of a “serious accounting error,” according to a draft opinion by an influential committee of 19 scientists and academics.

The European Environment Agency Scientific Committee writes that the role of energy from crops like biofuels in curbing warming gases should be measured by how much additional carbon dioxide such crops absorb beyond what would have been absorbed anyway by existing fields, forests and grasslands.

Instead, the European Union has been “double counting” some of the savings, according to the draft opinion, which was prepared by the committee in May and viewed this week by The International Herald Tribune and The New York Times.

“The potential consequences of this bioenergy accounting error are immense since it assumes that all burning of biomass does not add carbon to the air,” the committee wrote.

Duh. This has been a known fact to about everyone else, as most independent studies not done by a corn-state university have found ethanol to have, at best, zero utility in reducing atmospheric CO2.

It is worth noting that the EU would likely have never made this admission had it solely been under the pressure of skeptics, for whom this is just one of a long list of fairly obvious errors in climate-related science. But several years ago, environmental groups jumped on the skeptic bandwagon opposing ethanol, both for its lack of efficacy in reducing emissions as well as the impact of increasing ethanol product on land use and food prices.

The progressive argument for a larger state has, for over a hundred years, rested in part on the premise that smart people at the top in government can better optimize the allocation of resources and make better investment choices.

This premise always has been ludicrous. Government officials have neither the information nor incentives to perform this function, and lacking such, decisions always get made based on political rather than economic or other objective functions.

Ethanol is such a great example, it will almost be a shame when its mandates and subsidies are repealed. As a reminder, corn-based ethanol production get the trifecta of state sponsorship -- mandates for its use, subsidies for its protections, and stiff tariffs to prevent lower-cost imports.

The result is a classic government fail. The economic subsidies benefit only a small number of the politically connected, while hurting the great mass of humanity, even outside the US, through higher food and fuel prices. Because ethanol takes as much fuel to produce as it provides, it does nothing to change the amount of fossil fuels we use. And as a result, it does nothing to affect CO2 production and in fact has a number of environmentally negative effects, particularly in land and water use.

"U.S. ethanol refiners are consuming more domestic corn than livestock and poultry farmers for the first time, underscoring how a government-supported biofuels industry has contributed to surging grain demand.

The U.S. Department of Agriculture estimated that in the year to August 31 ethanol producers will have consumed 5.05 billion bushels of corn, or more than 40% of last year’s harvest. Animal feed and residual demand accounted for 5 billion bushels."

As Mark Perry shows in his blog, US ethanol policy has also pushed corn prices up from $2 a bushel in 2007 to over $8 today.

I would argue that the current obsession with small changes to trace levels of CO2 in the atmosphere has in fact gutted the environmental movement. Nothing else is getting done. ... My prediction– 10-20 years from now, environmentalists are going to look back on the current global warming hysteria as the worst thing ever to happened to the environmental movement.

The Commission is troubled by nearshore eutrophication, aquatic plant growth caused by excessive nutrients, which causes adverse effects on ecosystems, the economy, recreation, and human health. The reemergence of algal blooms is likely due to multiple factors, including inadequate municipal wastewater and residential septic systems; runoff from increased impervious surface areas and agricultural row-crop areas; discharges from tile drainage which result in more dissolved reactive phosphorus loading; industrial livestock operations; ecosystem changes from invasive mussel species; and impacts from climate change which include warmer water and more frequent and intense precipitation and stormwater events.

Of these listed potential causes, only the last, climate change, is not addressed at all in the main study document, nor is addressing climate change on their list of recommendations, which in fact emphasize that solutions tend to be local. In fact the tone of the study is that the causes are complex and poorly understood, but never again beyond this sentence is climate change mentioned or any evidence of increased precipitation or runoff presented.

One is left with the impression it was a toss-in on the list, included because climate change is "hot" and sexy and a magnet for funding and attention. Certainly the report provides no other evidence or detail as to why it is included in the list. Certainly any intelligent reader would understand that the climate change item was, at best, included to round out the possibilities of a complex and poorly understood problem, but that the study points to many of the other items on the list as more productive places to seek solutions.

Yep, he latched on to the last, least important item that is completely un-adressed by the main report. By doing so, he is in effect helping to distract attention from the real causes that can be addressed and diverting attention to issues that are tangential at best. The solution will likely involve better managing agricultural runoffs and dealing with municipal wastewater plants which are under-treating discharges.

This is why I say that the global warming hysteria will be looked back on as a dead time for the environmental movement, when obsession with trace amounts of CO2 either caused folks to lose attention on important issues, or even caused environmentalists to advocate for ecologically detrimental programs (e.g. biofuels).

A little late Al -- some of us realized this way back when it could have done some good, like before we spent billions of tax dollars and subsidized a stupid industry into being:

ATHENS, Nov 22 (Reuters) - Former U.S. vice-president Al Gore said support for corn-based ethanol in the United States was "not a good policy", weeks before tax credits are up for renewal.
...
"It is not a good policy to have these massive subsidies for (U.S.) first generation ethanol," said Gore, speaking at a green energy business conference in Athens sponsored by Marfin Popular Bank.

"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small.
"It's hard once such a programme is put in place to deal with the lobbies that keep it going."
He explained his own support for the original programme on his presidential ambitions.

"One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."
...
Gore said a range of factors had contributed to that food price crisis, including drought in Australia, but said there was no doubt biofuels have an effect.

"The size, the percentage of corn particularly, which is now being (used for) first generation ethanol definitely has an impact on food prices.

"The competition with food prices is real."

A couple of thoughts here. First, many detractors like myself have made the link between Iowa's role in the Presidential nomination process and support for corn ethanol, but it is nice to see a supporter confirm the link. Second, I wonder how many other scientific opinions Gore holds where political expediency blinds him to the reality of the data? I can think of at least one big one....

For a variety of reasons that have a lot more to do with subsidizing preferred business interests than energy or environmental policy, Congress has fallen in love with biofuel subsidies and mandates. We've talked quite a bit on this site about ethanol. Here is another example, via Mark Perry:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The article poses this as a dueling jobs situation, but the result not only leaves us worse off economically, it leaves us worse off environmentally. And the explanation is all Hayek and the limits on information possessed by a few individuals in Congress vs. 300 million market actors. It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were "waste." What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power.

But in fact, businesses (no matter how much environmentalists believe otherwise) abhor waste. When a tenth of a percent on margins is important, a lot of people have financial incentives to either reduce the waste or do something productive with it. Which is why there is a whole industry using sawdust and chips already to make various building products. And I won't go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

I am done using the phrase "dangers of government trying to pick winners" because it implies that they sometimes might be successful. They never are. When governments choose, they choose losers.

I get a lot of pushback on this, because it seems to offend people's intuition. They will say they know lots of good people they trust in government -- there is no way that all these smart, well-intentioned people are going to be so consistently wrong.

But the argument against government in this case (and in most other cases) is not based on the IQ or goodness of the individuals that populate it. The argument is that even good people in groups make terrible decisions due to problems with their information and incentives.

The information problem is one that Hayek is famous for addressing. In short, there is simply too much to know to make decisions for the entire economy. In fact, folks with high IQ's often do especially poorly in this context, because they tend to overestimate their own knowledge and problem-solving ability. And, even if one could be omniscient, it is still impossible to pick winners because 300 million people have different preferences and so one solution based on one set of idealized or mean preferences is going to sub-optimize for a lot of people (remember this now that we all have to have health insurance plans on the exact same terms and coverage).

The incentives issue is perhaps an even more powerful problem. We only have to look at the most recent health care bill and its progress through the legislative process to understand the power of incentives to shape rules and legislation in absurd ways.

Ethanol is a great illustration. Scorned by scientists as both bad energy policy and bad environmental policy, ethanol mandates and subsidies do nothing but hurt the environment. Ethanol generally takes more fossil fuels to produce than it replaces, it does almost nothing to reduce CO2 emissions, and it creates new environmental issues with land use as well as social issues from rising food prices. If you listed a hundred potential legislative initiatives to improve the environment and energy policy, ethanol would likely be in the bottom 10. But never-the-less, it is consistently the number 1 legislative solution adopted by western democracies, including the supposedly science-based Obama administration.

I used to say that if we could move the first Presidential primary out of Iowa, ethanol might go away, but obviously that understated the appeal of subsidizing the agricultural industry under the thin veneer of environmental policy, as demonstrated by these nutty large subsidies in Europe. Via Carpe Diem:

Biofuels production in Europe is heavily subsidized. Support has also been increasing in the past years and today stand at approximately EUR4 billion ($5.76B). Another way to look at subsidies is that every litre of ethanol consumed in Europe gets 0.74 EUR (about $4 per gallon) and every litre of biodiesel 0.5 EUR ($2.72 per gallon). The effective rate of assistance to biofuels (taking account of all measures of support) adds up to more than 250% for ethanol (see chart above). Biodiesel, and especially rapeseed crops, have lower effective rates of assistance (up to approximately 60%).

This structure of support and protection is not economically sustainable. It is rather close to economic madness to pursue the sort of self-sufficiency or industrial policy ambitions that have guided EU policy towards biofuels. The total cost of every unit of biofuel becomes far too high, which slows down the readiness to shift away from fossil fuels.

The biofuels policy in the European Union is a classic example of "green protectionism" "“ protectionism that is not motivated for the benefit of the environment, but which uses environmental concerns to pursue non-environmental objectives. The European Union runs an extensive policy for subsidies to biofuel production. Border protection increases the level of subsidy by giving a market support from consumers to producers. Standards are used to favour domestically produced biofuels. It is difficult to escape the picture of a policy driven by industrial ambitions rather than environmental concerns. The intention and/or the effect of Europe's policy is associated with beliefs of self-sufficiency. Obviously, trade is not considered to be an integral part of an environmental ambition to shift from fossil fuels to biofuels.

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

As I understand it, the paper companies had a process that has for decades been 100% biofuel powered, but if they now mix in some diesel fuel, they can get a tax credit under a provision that gives such credits for using a 50/50 diesel/biofuel mix. Obviously, the indended consequence were to get 100% diesel fuel users to mix in some biofuel, but the law was not written in a way to preclude the opposite.

I found nothing particularly new or unique about this example, but I did find the author's reaction depressing. Apparently, for Christopher Hayes, this is a failure of private enterprise, not of government:

I've come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I'm nowhere near cynical enough...

the episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation

First, the notion that the whole bio-diesel law was "nobly conceived" is a total hoot. Basically this law was originally a politically-motivated subsidy of a powerful political lobby (farmers and agribusiness) that most science has demonstrated to have zero impact on its nominal target (CO2 production). So all that is happening here is that one narrow business interest has hijacked the subsidy intended for a different narrow business interest. Seriously, I probably should know who this author is, but can anyone who has covered Washington for, say, a week or more really attach "noble" and "well-intentioned" as modifiers to "legislation" with a straight face?

Second, as a back-check on all the "well-intentioned" stuff, note that there has been no movement to change the original law now that this exploit is understood. Why? Because, Mr. Hayes says, the paper industry has a powerful political lobby. I am having a hard time reconciling the picture of a group of folks in Congress failing to fix an expensive exploit in a law due to political pressure from 8-10 corporations with the view that these same guys passed the original law nobly and with the best of intentions.

Finally, there seems to be a general reaction, particularly on the left, that if Congress were just smarter then this would never happen. But it HAS to happen. It is a mathematic certainty. No one, no matter how smart, can make changes to a single variable in a nearly infinitely large, chaotic, and multi-variate system like the economy and understand fully what the consequences will be. It's absurd hubris to think otherwise.

I think a lot of economists are of two minds about Obama. When they look at his economics team, they are impressed with the talent and depth. America could do worse than have economic policy guided by this team. But when Obama opens his mouth to express his own opinions on trade or economics or finance, I get really nervous. I keep wondering who will guide economic and energy policy -- his smart staff, or the Obama his smart staff keeps trying to hide.

Robert Bryce, the author of Gusher of Lies, one of the best books on
global energy issues you will ever read, is also a co-editor of Energy
Tribune, a leading monthly. In the October edition, he takes aim at
ethanol calling it a scam and "pure, unadulterated lunacy."

Bryce
writes, "Barack Obama doesn't want to talk about corn ethanol. And it's
no wonder. In early August, his campaign Web site purged several
sections of his energy plan that talked about corn ethanol.

"Before
the purge, Obama was touting corn ethanol as a pivotal element in his
push for "˜energy independence.' His site declared that Obama "˜will
require 36 billion gallons of renewable fuels to be included in the
fuel supply by 2022 and will increase that to at least 60 billion
gallons of advanced biofuels like cellulosic ethanol by 2030."

By
August, however, Obama had come up with a new set of talking points on
energy and "All mentions of corn ethanol were removed," wrote Bryce.
"The word "˜ethanol' only appears once."

Do not be fooled. Obama
is a major proponent of ethanol. Bryce reports that, "In January 2007,
Obama and two other senators, Democrat Tom Harkin of Iowa and
Republican Richard Lugar of Indiana, introduced legislation called the
"˜American Fuels Act of 2007.' It aimed at promoting the use of ethanol
and provided mandates for the use of more biodiesel."

Obama's
national campaign co-chair is Tom Daschle, the former Senate majority
leader and longtime ethanol booster. Daschle serves on the boards of
three key ethanol companies. Obama represents Illinois, a state that
trails only Iowa and Nebraska in ethanol production capacity.

Y'all may have already seen these -- being on vacation, I am a little late to the table on both. The first is a report on the Missouri state ethanol mandate:

A report from a Missouri-based research organization
debunks the claim that Missourians are saving money through a state law
requiring that retail gasoline contain a minimum of 10% ethanol. The
report is in reaction to an assertion by the Missouri Corn
Merchandising Association (MCMA), alleging that Missourians will save
more than US$ 285 million through the E-10 mandate in 2008, and nearly
US$ 2 billion over the following decade.

The MCMA arrived at these numbers by taking the price
difference between pure-grade gasoline and E-10 blended fuel, and
multiplying it by Missouri's projected annual consumption.

However, the report by the Show Me Institute reveals two fundamental flaws with this calculation. One
is that it fails to take into account the fact that E-10 blended fuel
is cheaper because ethanol producers receive tax credits and other
subsidies.

"Government officials cannot simply take tax dollars from
the public, give those tax dollars to ethanol blenders, and then have
ethanol supporters tell the public that ethanol is saving them money
with cheaper fuel as though the subsidy never existed," write the
report's authors, Justin P. Hauke and David Stokes.

The MCMA also does not take into account that E-10
blended fuel is about 2.5% less efficient than pure-grade gasoline,
meaning that Missourians will be filling their tanks more often.

When both of these factors are taken into account, the ethanol blending mandates are shown to be costing Missourians about US$ 118 million per year.

Biofuels have forced global food prices up by 75% - far
more than previously estimated - according to a confidential World Bank
report obtained by the Guardian.

The damning unpublished assessment is based on the most
detailed analysis of the crisis so far, carried out by an
internationally-respected economist at global financial body.

The figure emphatically contradicts the US government's
claims that plant-derived fuels contribute less than 3% to food-price
rises. It will add to pressure on governments in Washington and across
Europe, which have turned to plant-derived fuels to reduce emissions of
greenhouse gases and reduce their dependence on imported oil.

Senior development sources believe the report, completed in
April, has not been published to avoid embarrassing President George
Bush.

"It would put the World Bank in a political hot-spot with the White House," said one yesterday....

[The report] argues that production of biofuels has
distorted food markets in three main ways. First, it has diverted grain
away from food for fuel, with over a third of US corn now used to
produce ethanol and about half of vegetable oils in the EU going
towards the production of biodiesel. Second, farmers have been
encouraged to set land aside for biofuel production. Third, it has
sparked financial speculation in grains, driving prices up higher.

Other reviews of the food crisis looked at it over a much
longer period, or have not linked these three factors, and so arrived
at smaller estimates of the impact from biofuels. But the report
author, Don Mitchell, is a senior economist at the Bank and has done a
detailed, month-by-month analysis of the surge in food prices, which
allows much closer examination of the link between biofuels and food
supply.

The report points out biofuels derived from sugarcane, which Brazil specializes in, have not had such a dramatic impact.

All this stuff was known long before Congress voted for the most recent ethanol mandates. Why is it that the media, who cheerled such mandates for years, is able to apply any institutional skepticism only after the mandates have become law? Are we going to have to actually pass some awful version of carbon trading before anyone will consider its inherent problems?

Last week I tried to explain why the choice of plant, whether it be a food plant or a non-food plant, that is used to make ethanol is mostly irrelevant to whether ethanol mandates raise fuel prices, at least with current technologies. I wrote:

Food prices rise not because food is converted to ethanol per se, but
because the amount of grains going into the food supply decreases. The
issue is the use of farmer's time and resources and the use of prime
cropland to grow plants for fuel rather than food for consumption. The
actual crop used to make the fuel, whether corn or switchgrass, does
not matter to food prices -- it is the removal of farmers and cropland
from food production that matters. The only way cellulosic ethanol is
likely to improve food prices in substitution for corn is by being more
efficient per acre in fuel yields than corn (which may turn out to be
the case, but has not yet been proven in this country). But even so,
incremental improvements in yield don't help much, because we are
talking about enormous (40-50% or more) amounts of US cropland that
would have to be dedicated to fuel, whatever the plant technology, to
meet the current ethanol mandates.

I almost didn't post this the first time around, because I thought it was so obvious. But on Sunday the NY Times blundered right into the same silly assertion:

This does not mean that Congress should give up on biofuels as an
important part of the effort to reduce the country's dependency on
imported oil and reduce greenhouse gas emissions. What it does mean is
that some biofuels are (or are likely to be) better than others, and
that Congress should realign its tax and subsidy programs to encourage
the good ones. Unlike corn ethanol, those biofuels will not compete for
the world's food supply and will deliver significant reductions in
greenhouse gases.

Of course, the ability to produce such biofuels with these magic powers has never actually been demonstrated, but I am all for them when and if someone invents them. Efficient conversion, for example, of corn stalks, rather than corn itself, to fuel would be great and would solve this trade-off. This technology does not exist today -- and only a lot of hand-waving can translate cellulosic ethanol successes in switchgrass to corn stalks. Also recognize that even this has costs hidden to us non farmers, because corn stalks are used for a variety of purposes today. My guess is that cellulosic ethanol from corn may be economically feasible, but only after some genetic modifications of the plant itself.

OK, I buried the lede. The post is actually not the sex lives of algae. But I was fascinated that CNN chose to list this among the "story highlights" of this article. The story supports my sense that if biofuels are ever going to make sense, they are not going to be made from corn. The story also reinforces the notion that biofuels are just another type of solar energy, though they are in fact even more inefficient than our not-there-yet solar panels in converting sunlight to usable energy. The only reason biofuels currently look more economic than solar are the enormous operating subsidies and the much lower capital costs (though even the latter is open to argument since biofuels have huge capital costs in terms of land, but that generally is factored in as "zero" because the land is already being farmed.)

Before you get too excited about algae, note from the picture that the algae at this farm is grown in plastic packets that I would bet my life require more hydrocarbons to produce than the algae inside them provides.

I feel like I have said what needs to be said on biofuels. Subsidizing and mandating biofuels with current technologies is terrible fiscal policy, bad environmental policy, ridiculous energy policy, and, perhaps most important, disastrous for the world's poor.

The widespread use of ethanol from corn could result in nearly twice the greenhouse gas emissions
as the gasoline it would replace because of expected land-use changes,
researchers concluded Thursday. The study challenges the rush to
biofuels as a response to global warming.

The researchers said that past studies showing the benefits of ethanol in combating climate change
have not taken into account almost certain changes in land use
worldwide if ethanol from corn "” and in the future from other
feedstocks such as switchgrass "” become a prized commodity.

"Using good cropland to expand biofuels will probably exacerbate
global warming," concludes the study published in Science magazine.

Promoters of biofuels often hold up Brazil as an example of a model ethanol mandate. Forget for a moment that in fact ethanol still makes up only a small percentage of the transportation fuel market in Brazil. Think of all those satellite photos we used to see of farmers burning the Amazon to expand cropland:

I know that correlation is not equal to causation, but the fact is that this land clearing, which has always one on, really accelerated after the Brazilian ethanol mandates and subsidies. My prediction is that careful academic work in the coming years will pin the blame for a lot of the destruction of the Amazon on ethanol.

The study's findings aren't likely to change government policy, since
ethanol mandates are a political boondoggle that only dupes expect to
have any effect on the climate. If the first caucuses were held in
Hawaii, they'd be forcing us to run our cars on macadamia nuts instead
of corn.

From the Washington Post, via Tom Nelson, comes a nice summary of the consequences of Congress's addiction to ethanol mandates and subsidies. The last sentence in particular is one I have warned about for a while on this issue.

To be sure, some farmers in these countries benefit from higher prices.
But many poor countries -- including most in sub-Saharan Africa -- are
net grain importers, says the International Food Policy Research
Institute, a Washington-based think tank. In some of these countries, the poorest of the poor spend 70 percent or more of their budgets on food.
About a third of the population of sub-Saharan Africa is
undernourished, according to the Food and Agriculture Organization of
the United Nations. That proportion has barely changed since the early
1990s. High food prices make gains harder....It's
the extra demand for grains to make biofuels, spurred heavily in the
United States by government tax subsidies and fuel mandates, that has
pushed prices dramatically higher. The Economist rightly calls
these U.S. government subsidies "reckless." Since 2000, the share of
the U.S. corn crop devoted to ethanol production has increased from
about 6 percent to about 25 percent -- and is still headed up....This
is not a case of unintended consequences. A new generation of
"cellulosic" fuels (made from grasses, crop residue or wood chips)
might deliver benefits, but the adverse effects of corn-based ethanol
were widely anticipated. Government subsidies reflect the careless and
cynical manipulation of worthy public goals for selfish ends. That the
new farm bill may expand the ethanol mandates confirms an old lesson:
Having embraced a giveaway, politicians cannot stop it, no matter how
dubious.

Environmentalists are warning against expanding the production of
biofuels, noting the proposed solution to global warming is actually
causing more harm than it is designed to alleviate. Experts report
biodiesel production, in particular, is causing the destruction of
virgin rainforests and their rich biodiversity, as well as a sharp rise
in greenhouse gas emissions.

Opponents of biofuels read like a Who's Who of environmental
activist groups. The Worldwatch Institute, World Conservation Union,
and the global charity Oxfam warn that by directing food staples to the
production of transport fuels, biofuels policy is leading to the
starvation and further impoverishment of the world's poor.

On November 15, Greenpeace's Rainbow Warrior unfurled a large banner
reading "Palm Oil Kills Forests and Climate" and blockaded a tanker
attempting to leave Indonesia with a cargo full of palm oil.
Greenpeace, which warns of an imminent "climate bomb" due to the
destruction of rich forests and peat bogs that currently serve as a
massive carbon sink, reports groups such as the World Wildlife Fund,
Conservation International, and Flora and Fauna International have
joined them in calling for an end to the conversion of forests to
croplands for the production of biofuels

"The rush to address speculative global warming concerns is once
again proving the law of unintended consequences," said James M.
Taylor, senior fellow for environment policy at The Heartland
Institute. "Biofuels mandates and subsidies are causing the destruction
of forests and the development of previously pristine lands in a
counterproductive attempt to improve the environment.

"Some of the world's most effective carbon sinks are being destroyed
and long-stored carbon is now being released into the atmosphere in
massive quantities, merely to make wealthy Westerners feel like they
are 'doing something' to address global warming. The reality is, they
are making things worse," Taylor noted.

I have no problem if someone wants to compete out there in the free market producing fuel from corn or switchgrass or whatever. But we have got to stop the subsidies right now, before it is too late. Biofuels do absolutely nothing, zero, zippo to change CO2 production, and some studies show they make CO2 output worse when you consider the whole production cycle. This is not to mention the effect biofuels will have in putting more wild and forest land under the till.

I can't see any conceivable benefit to the economy from subsidizing biofuels, except some hazy notion of energy independence which has limited economic value and which will never be achieved with biofuels (we will have jacked up the price of corn so high we can't feed cattle long before biofuels make even a minor dent in oil imports). My only guess as to true motivation is that people want to spite Exxon and Shell, but if you don't like those companies, you really aren't going to like Archer Daniels Midland.

Biofuels, given current technology, are a pure product of politics. They are a massive subsidy of Midwestern farmers that the recipients can claim is not really a subsidy. If the first presidential primary were in Nevada rather than Iowa, you would never hear a word from politicians about ethanol.

A $400-million integrated biodiesel and ethanol refinery the first
complex of its kind in North America will be built in central Alberta.

Led
by Dominion Energy Services, LLC a Florida-based group with pioneering
ties to Calgary's natural gas marketing sector investors that include
$45-billion US private equity fund The Carlyle Group LLC and affiliate
Riverstone Renewable Energy Infrastructure Fund I, LP said Monday they
have finalized plans for the facility....

Alberta Agriculture Minister Doug Horner noted the "world-class"
Dominion plant follows the provincial government's recent, $239-million
over five years initiative to boost biofuels production. The province
will provide a 14-cent per litre production credit to the facility. [for those rusty on the metric system, that is 56-cents per gallon or $23.53 per barrel]

Companies are currently building massive subsidy-magnets biofuel plants. Once these investments are in place, there is going to be a huge entrenched base of investors and workers who are going to wield every bit of political power they can to retain subsidies forever to protect their jobs and their investment. Biofuel subsidies will be as intractable as peanut and sugar subsidies and protections.

Update:Radley Balko mentions another great example. For various post-prohibition reasons that may or may not have made sense at the time, state laws prohibit retailers from buying alcoholic beverages straight from the manufacturer - e.g. Costco cannot buy direct from Anheiser-Busch. Wholesalers who emerged to fill the legally required middleman role became rich. Since then, even thought this 3-layered distribution requirement makes zero sense, it has become impossible to change it because the wealthy distributors who owe their fortunes to the requirement block every move to deregulate.